The final report from the FCA on retail banking business models, released in January, provides some valuable insight into the challenges, opportunities, and considerations for retail banks in the UK. The report reflects on the changes in consumer behaviour, the impact of the pandemic and the increasing market competition, highlighting key areas of considerations for all retail banks. In this summary, Vicki Butcher, Client Partner discusses the following four key areas of focus from the report and provides a series of recommendations for retail bank organisations and operational leaders to consider:

1. Optimising branch networks to maintain channel choice and access to cash 

2. Creating agility to maximise revenue opportunities 

3. Scaling for growth in a digital bank 

4. Harnessing the need for non-standard lending 

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Optimising branches to maintain channel choice and ensuring access to cash 

The pandemic has certainly accelerated the level of change over the past two years, particularly in digital transformation. However, not all change is permanent.  Whilst it is likely we will see a continued rise in digital banking needs from consumers, the pace should be steadier.  As the FCA’s report highlights, customers who rely on cash, prefer a face-to-face service, or have specific needs, may not be able to, or wish to, use digital channels.  Consider the following: 

• An Ofcom report in 2021 found that there are c1.5 million households in the UK with no internet access; whilst this is decreasing through government support and competitive tariffs, in the short-term there is still a need to provide non-digital financial services for these customers   

• The FCA reported in 2021 that there are over 27 million adults in the UK showing characteristics of vulnerability; this ranges from physical and mental wellbeing to financial resilience. Branches can offer vulnerable customers a safe space to access support and advice.  

There is increasing focus to ensure that customers, regardless of their circumstances, are not adversely impacted and do not suffer poorer outcomes.  This is particularly important for those with a branch network where, over the past 5-6 years, we have seen nearly half of the UK’s branches close.  Whilst it may seem right to reduce costs through a reduction in footprint, branches are a critical part of ensuring access to cash and to treating customers fairly.   However, footfall is dwindling, with a recent survey by Webhelp identifying that only 17% of UK banking clients prefer a branch interaction, compared with 61% who selected online (the highest of all European countries surveyed).   

This presents a great opportunity to get creative, to optimise the use of physical space and redesign the branch network of the future to create enhanced customer experiences and new revenue streams.  Whilst some banks have already started to remove the traditional ‘counter’ style branch and created adaptable spaces, there is more that can be done.  For example, options beyond the traditional branch include: 

• The creation of non-static spaces that take the bank to the customer, providing access to services in places with significant footfall, such as a counter within a supermarket, train station or a pop-up in the local shopping centre.  This could work well with a virtual or hybrid workforce, as colleagues would benefit from the flexibility of being based from different workplaces 

• An expansion on the Post-Office counter arrangement model, where experiments have already been undertaken to trial shared banking hubs, with great initial results.  This approach could present further opportunities to engage with the local businesses and the community  

Where maintaining a branch network remains important, options include: 

• Tailoring the branch space to create an environment that allows customers to go ‘behind the scenes’, and further engage with employees through their channel of choice 
• Creating multi-functional, adaptable, open spaces which could be hired for events and functions or, support ‘Levelling Up’ by providing access to broadband or PCs for those who do not have access at home  

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Creating agility to maximise revenue opportunity 

The FCA’s report highlighted the growing revenue pressure facing the banking sector. With net interest margins falling and the continued focus on managing operating costs, it is increasingly important for banks to look across their product set and find new ways to generate income.   

The report showcases examples of businesses who have capitalised on the impact of the pandemic (e.g. Starling and Monzo), who offered start-up support and focused on BCA (Business Current Accounts).  These actions have raised the market share of both banks in recent years. 

In the mortgage market there are high levels of competition on interest rates, with record rates on products announced recently. The margin on mortgages, with funding levels remaining low, has helped banks increase their revenue. However, as financial stress for customers intensifies with continued rises in interest rates, the increased revenue potential may be short-term. 

This ability to identify market opportunities and quickly respond with ‘fast-track’ solutions will be essential.  To larger banks or those with legacy infrastructure, this may feel like a large undertaking.  The complexity built over time, especially around compliance and regulatory requirements, could result in internal bureaucracy restricting the ability to move quickly.  Progress can be made though, for example: 

• Create a fast-track internal decisioning process to take an opportunity to market quickly, simplifying the governance whilst also ensuring the right level of due diligence 
• Create task force teams which include cross-business representation, like those we see for business continuity/incident management.  The aim here is to better facilitate design, development and implementation of new products/services 
• Develop or secure flexible resourcing options which allow a rapid pivot to market, switching effort to a new product or service quickly

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Digital banks scaling for growth 

In the UK, it is reported that over 14 million customers have a digital only bank account, increasing from 9% to 27% between 2019 and 2022.  Digital banks offer a simple and innovative mobile and web capability, and an easier process for those digitally savvy customers.  This increasing demand for customers to have access to seamless digital services puts incumbents at risk of losing market share.  However, there are challenges for digital only banks: 

• There are barriers to digital adoption, particularly depending on the customers’ location.  Data in January showing the percentage of customers who have a digital only account by region, highlighted significant differences across the UK.  Londoners have the highest digital bank adoption (40%) whereas regions such as the Northern Ireland and the North of England are far less likely to open a digital-only account (20-25%)  
• Competing with the well-known and highly established banks in the UK can be difficult, especially with customers who select their bank based on emotional values, such as trust and the ‘personal’ feeling they have towards a long-established brand 

The FCA’s report highlights that, whilst the value of digital only current account balances is increasing, they are still less likely to be the main bank for their customers. This results in lower balances, fewer transactions, and lower overdraft usage.  This is gradually improving as customers gain more experience and familiarity with the services a digital bank offers.  Gaining the trust of consumers will be important, capitalising on the ease of doing business and providing a broader range of services.  When developing a business model which enables growth, digital banks should consider: 

• Increasing the product offering, including lending -– this will support businesses with further funding options and build a broader product set to attract new customers.  The increased offering also gives greater opportunity for cross-selling and diversification, whilst maximising revenue generation 
• Embracing customers of all levels of digital maturity – developing a service proposition which caters for customers who have specific needs or are less experienced with digital banking, digital banks can leverage their human capability and provide dedicated, personalised services.  This provides an opportunity to create specialist support, which not only helps the customer but also provides staff with new ways to build skills and knowledge, helping to nurture and retain talent.  
• Look to non-banking brands for inspiration – a recent Webhelp survey found that if Google, Apple, Facebook, Microsoft or Amazon were to start offering banking services, 46% customers said they would switch. These brands have become integrated into everyday life, whether for social connection, work or because of the ease of access.  Their approach to digital design could provide new opportunities to look differently at how banks interact with their customers.  

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Harnessing the opportunity for greater non-standard lending options 

Specialist lenders and some smaller banks provide a growing need for non-standard lending, whether this be to those customers with a poorer credit history or those who have specific income circumstances.  Whilst there has been a steady increase in this type of lending, the impact of the pandemic on income and household costs are likely to accelerate the demand for non-standard lending.  This is supported in a 2021 poll where brokers predicted significant growth, particularly for complex credit and self-employed workers.  The specialist lending market also provides an opportunity for increased product offering, offering more flexibility than the traditional banks.   

We believe that this increased focus on non-standard lending on the part of some smaller lenders will increase choice for some consumers who might not have otherwise been able to get a mortgage. As such, we consider that the diversity of business models provided by smaller and more specialised lenders can be beneficial to consumers, provided lenders maintain sound underwriting standards.

FCA Report 2.41

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There are two aspects to consider here; the relationship management model and a customer journey led approach. 

1. For those lenders working closely with brokers, there is an opportunity to provide new and innovative relationship management models, which provide confidence in delivery with a personalised and dedicated service.  An example we’ve seen work well is a cell model, bringing together colleagues from the end-to-end journey and providing the broker with a single point of contact and/or a case manager.  This model yields profitability benefits, better leveraging human capability and reduced operating costs.  
2. Analysing the end-to-end customer journey provides an assessment of the current state and draws focus to areas of opportunity.  This approach works particularly well in journeys with a heightened risk or require a specific level of compliance (e.g. Fraud).  The journey can be designed in a way which optimises each touchpoint and reduces the likelihood of overburdening the processes with complexity, whilst also protecting the customer and the organisation. 

The FCA’s report provides a wide range of insights. There are significant opportunities for banks in the UK to carry on and potentially re-orientate their transformation, further innovate and capitalise on customer behaviour changes and market opportunities – driving revenue, improving operations and enhancing the customer experience. 

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Vicki Butcher has over twenty years’ experience working in financial services, with extensive expertise in leading operational teams to deliver high quality customer experiences.  Through a series of senior leadership roles, Vicki has a strong understanding of how to build and leverage internal capability to safely delivering commercial value.  Leading successful large scale transformation programmes across the world for firms such as HSBC, she understands how to deliver change quickly and effectively and the need to underpin this with a strong customer and cultural focus.